Does someone depend on you for financial support? Do you want to leave a legacy to those you love? Do you want a secure financial future for your family in a world full of uncertainty? Then you might consider life insurance. But how much life insurance do you need?
When it comes to this important decision, how do you know how much life insurance you actually need? There isn’t a one-size-fits-all answer to this question. Fortunately, figuring out how much life insurance you need is easier than you think.
Six Top Considerations
1. Why the 7-10 rule just isn’t cutting it
It used to be that having seven to 10 times your annual salary was a good way to measure how much life insurance you should purchase, but because the standard 7-10 rule is based on a general rule-of-thumb rather than on your individual needs, using this formula is really just taking an educated guess. In fact, most experts now agree that having even 10 times your yearly salary is not enough for most families today. Underestimating their future financial needs is the main reason why so many of families are underinsured. The reality is, most U.S. households only own enough life insurance coverage to replace 3.6 years of income – a clear indicator that many of us don’t understand the basics of calculating how much life insurance we may need.
2. How much income will your family need when you’re gone?
Since the 7-10 rule is not cutting it, how do you know how much income your family will actually need? If you weren’t here tomorrow, would your family have enough money to meet everyday living expenses? If not, then at the very least, you should consider buying enough life insurance to replace your lost income. For example, if you’re making $50,000 a year and looking at a 20-year term life policy, you may need up to $1 million in coverage. And don’t overlook the fact that the cost of childcare and hiring outside help to manage household responsibilities can take a big chunk out of the family budget. For this reason, a stay-at-home parent needs a life insurance policy just as much as the parent bringing home the paycheck.
Everyone’s circumstances are different, and that’s why it’s important to begin every life insurance process by asking you questions to determine what your unique financial needs are. Because, quite frankly, you can’t get you the right coverage unless your insurance agent understands more about what you want your life insurance to do for you.
3. How much debt do you have?
If you have debt, then in addition to replacing your salary, you’ll want to factor in what you would need today to repay your creditors if you were to die tomorrow. For example, do you have a brand new 30-year mortgage or is your home nearly paid for? Do you have car payments, credit-card debt, or other personal loans? What about a student loan? Many parents have thousands of dollars in student loan debt that would be easily paid off with a life insurance policy. If you have debt, then you’ll want more life insurance coverage to pay it off.
4. What are your long-term goals?
Almost everyone has long-term financial goals. Do you have children who will be going to college? Will losing your income change these plans? Does your family need to replace an older vehicle or even add a vehicle for a driving teen? What about retirement income for your spouse? Be sure to factor in the extra money your family may need for these and other future expenses. If you haven’t set aside enough savings for these types of expenses, then you’ll want to consider more life insurance.
5. How long will your children (or other people you care about) be dependent on you?
Are you raising young children or are your teenagers ready to fly the nest? The younger your children are, the more life insurance you should get. While some of your loved ones will eventually become independent, you should also consider those who may not. This is especially important if you have someone who is dependent on you because of special needs. A special-needs child or an aging parent could require your support for their lifetime.
6. Leaving a legacy
Are you a grandparent wanting to give your grandchildren a leg up for college? Would you like to help them buy their first home or start a new business? A life insurance policy can be an ideal way to leave them a legacy. Or you may want to give a large donation to your favorite charity. There are many ways you can use your life insurance to leave a legacy.
As you can see, there are many questions you should ask yourself to determine how much you need.
Asurea offers Life Insurance, Mortgage Protection Life Insurance, Medicare Supplement Insurance, Final Expense Insurance, Disability Insurance, Long-term Care Insurance, Retirement Planning products and more. For additional information, click on the ‘Learn more’ button below. Want to have articles just like this delivered to your inbox? Just enter your email address in the box below and click ‘Subscribe.’
This information is provided for general consumer educational purposes only and is not intended to provide legal, tax or investment advice. Dollar amounts are for illustrative purposes, not actual.
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